Fed Remarks Rattle Stocks

Fed Remarks Rattle Stocks

Updated from 11:37 a.m. EST
Stocks in the U.S. lost steam Wednesday afternoon and pulled back toward the flat line as investors fretted about comments from a Federal Reserve official that reminded traders the central bank is still keeping its eye on inflation.

The S&P 500 lost 1 point to 1336, and the Nasdaq Composite fell 7 points to 2303. The Dow Jones Industrial Average tacked on 9 points to 12,274.

Traders attributed some of the pullback to comments from Philadelphia Fed President Charles Plosser, who said inflation was still a concern for policymakers. The Fed had gotten away from talk of rising prices as it dealt with market turmoil and cut rates, so this reminder of the inflationary concerns may have investors, who want more easing, worried.

During a speech, he said that while inflation expectations haven't changed a great deal, "they bear watching because there are some signs that they ... are edging higher. These may be early warning signs of a weakening of our credibility, and we must be very careful to avoid that."

Also, the markets took a blow when Macy'sM said it would cut more than 2,000 jobs and gave a pessimistic outlook about the health of the consumer. The retailer's shares shed 4.1%.

Consumer activity comprises about two-thirds of U.S. gross domestic product, meaning any problems on that front could lead the economy ever closer to a recession.

"We're kind of waiting for the next catalyst," said Bill Nichols, trader at Bear Stearns. "People are looking ahead to tomorrow's jobless-claims numbers. We're working through the same issues that have dogged the market for the last few months," such as housing weakness, along with subprime and credit-market woes.

Investors earlier had cheered strong earnings from Walt DisneyDIS and JDSUJDSU, sending the market higher before momentum sputtered in the midafternoon.

Dow component Disney gained 5.3% after it topped analyst targets for its latest quarter amid sturdy results from its theme parks and TV divisions. JDSU surged 28% on the heels of its upbeat second-quarter report. Adjusted earnings of 22 cents and sales of $399.2 million both exceeded expectations.

Turning to the day's economic data, fourth-quarter productivity came in much better than expected, climbing 1.8% and more than tripling forecasts. Still, the rate of growth slowed markedly from the third quarter's 6%. Unit labor costs were up 2.1%, below the anticipated 3.5% increase.

"Investors need to be patient and give the Fed a chance," said Ted Weisberg, floor trader at Seaport Securities. "One can assume that eventually we will begin to see positive traction from lower interest rates."

THESTREET.COM